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Divorce Mediation Blog

Can’t Blame a Guy for Trying, But the Courts Do their Job in Dilanian v. Dilanian

Wednesday, December 05, 2018

Levine Dispute Resolution - Alimony

The recent decision, Dilanian v. Dilanian, from the Massachusetts Appeals Court describes a litany of unreliable evidence from which a trial judge drew negative inferences about the malfeasance of a divorce-litigant husband, finding that he tried to obscure and shelter both assets and income from his wife and from the court. The Appeals Court agreed with the Probate and Family Court judge, and upheld her decision.

The self-employed husband depressed his apparent income after the divorce filing, by decreasing his profit distributions and increasing his retained, undistributed earnings, without legitimate explanation. You can’t do that!

On a defined contribution plan, the sole- business-owner husband presented documents with the number of retirement plan participants yo-yoing periodically, attempting to reduce his share of the pension pool, for equitable division with his wife. Can’t do that either.

By post-trial motion, the executor-trustee-beneficiary husband tried to take back his inaccurate trial testimony in which he overstated his rights in his father’s estate, which the court had accepted, and later sourced to the husband’s own inexcusable neglect. That doesn’t work.

But the howler in the bunch, of which the Appeals Court made but passing note, the pension plan-administrator husband tried to dilute his share of a defined benefit pension plan by including his late father as a member of the plan, thus trying to divert a chunk of the pension from the court’s equitable division powers.

Only problem was that the plan documents that the husband himself offered in evidence showed that his father was no longer alive when the plan was created.

None of this is particularly surprising in the Probate & Family Court, where Stephen Colbert’s notion of “truthiness” has a long history. But, the audacity to lie in plain sight of a dated document that he himself put into evidence is, simply put, Trumpian.

To borrow a cliché from left wing TV, the “institutions held”: the trial judge sniffed out the rouse, and the appellate court backed her up.

Good for them.

 

Lost in Translation: Reading Tea Leaves on 2019 Alimony Deduction

Wednesday, November 21, 2018

Translation can be a tricky thing.


Just ask this restaurant owner in China, above. (https://lingualinx.com/blog/the-funniest-examples-of-translation-gone-wrong/).

Or, yourself, as you try to assemble your kid’s imported toy next month using instructions that seem reverse engineered from Chinese to Japanese to English; and while reading your next off-shore spam email.

Q4 2018 is a time of searching for clues from the U.S. Treasury about how it will apply 2019’s alimony prohibition for those still struggling to strike alimony deals this year in hope of retaining future deductibility. We’d hope that the challenge would not be compounded by language whose meaning has been lost in translation, but…

While lawyers, judges, mediators and arbitrators struggle to glean government’s intentions through statutes and regulations, the public relies on IRS instructional publications for their primary understanding of tax law.

A colleague recently shared the following draft language for Publication 504 “Divorced or Separated Persons”, the IRS’s public instructions about matters including alimony. Read it as a layperson might:

    Line 11 Alimony Received Enter amounts received as alimony or separate maintenance. You must let the person who made the payments know your social security number. If you don’t, you may have to pay a penalty. For more details, see Pub. 504.

That’s my underlining. It is self-referential and circular, but hey, it’s only a draft.

More substantively, the language continues:

    TAX TIP: Alimony received will no longer be included in your income if you entered into a divorce or separation agreement on or before December 31, 2018, and the agreement is changed after December 31, 2018, to expressly provide that alimony received is not included in your income.

That is their italics, presumably to draw us to its importance. The color-coding is mine, to help illustrate the following. What does this communicate to the reader?

  • The impatient reader, or one who recalls her English teacher defining an independent clause as phasing that has a subject and a verb, and produces a complete thought, may focus on

    “Alimony received will no longer be included in your income if you entered into a divorce or separation agreement on or before December 31, 2018…”

    From which taxpayer might rightfully conclude that her lawyer was crazy in trying to craft an alimony deal in 2018 since taxable alimony has been retroactively repealed. What was the rush about, anyway?

    She might also conclude, let’s wait to talk turkey until after new year, since this clause also implies that 2019 agreements will produce deductible alimony. Huh?
  • The more patient taxpayer will also read “…and the agreement is changed after December 31, 2018, to expressly provide that alimony received is not included in your income.” After suffering through two dependent clauses that rely on the passive tense and a sort of double negative (“no longer” and “not”), one may well wonder “what’s the big deal?” After all, if my 2018 alimony deal does not produce reportable income to me, then who cares if a change to my agreement simply confirms that result?

Careful and repeated readings of this one sentence, by one who understands tax law, will ultimately yield an accurate statement of law. But given its intended audience, might not the drafters have simply said:

    “If you and your spouse signed a divorce or separation agreement before December 31, 2018, that required taxable alimony, the alimony that you receive in 2019 or later will be included in your income. However, if you and your spouse or former spouse amend that agreement in 2019 or later, and your amended agreement expresses that future alimony will not be taxable, then the alimony that you receive in 2019 or later will not be included in your income.”

Is draft publication 504 a symptom of poor drafting or something more insidious, like deliberate obfuscation of taxpayer’s rights and obligations?

On a more nuanced level, does the fact that draft publication 504 makes reference to “divorce and separation agreements” only, and not to court orders or judgments, imply that 2018 alimony agreements will be deemed qualified deductible support in 2019 without the need for a judge’s endorsement, as much precedent suggests?

I hope so. The absence of reference to court orders is soothing, and perhaps indicates that my previously expressed worries are misplaced.

But then, what happens if the parties take a merging agreement for alimony, signed in 2018, to a court in 2019, and the judge does not approve the deal for incorporation into an order or judgment?

Of course, this is only a draft, and as a public “instruction” only, it is not law. See, https://www.forbes.com/sites/robertwood/2015/11/11/amazingly-irs-says-you-cant-rely-on-irs-instructions/#21b2923d341a.

So, I think I’ll still wait for the temporary regulations before I let down my guard entirely.

Thanks to David H. Goodman, CPA, of Gosule, Butkus & Jesson, LLP for the draft language. Stay tuned for David’s piece about alimony trusts in the next LDRC newsletter.

 

“Thanks for your service, son. Now, about that child support…” Bobblis v. Costa

Wednesday, November 07, 2018

Levine Dispute Resolution - Divorce Mediation

I’ve drafted a lot of separation agreements over the years. I have also been accused, on occasion, of trying to anticipate some pretty unlikely events. But I never considered the possibility that a child support payor might try to stop paying because his kid earned a college scholarship, let alone one that committed him to military service after graduation!

Really?

Instead of saying “congratulations, and thank you, son”, the father demanded retroactive termination of child support to the start of his son’s ROTC training, junior year, citing the “military enlistment” emancipation provision of the parties’ divorce agreement. And to think, Claire Booth Luce had never heard of the Bobblis case when she coined “No good deed goes unpunished”.

The Probate and Family Court dispatched the father’s demand with careful legal analysis. The Massachusetts Appeals Court did the same, crediting Judge Lisa Roberts’ good work, and distinguishing military enlistment (and full time attendance at West Point or other military academy), from attending college on a military-provided scholarship. The appellate panel upheld the trial judge’s ruling that the child remained unemancipated, and child support unchanged.

The father represented himself at the trial level, but he had counsel on the appeal. Presumably, his lawyer advanced irony-free arguments that she believed would survive the giggle test. The Appeals Court accorded the appellant and his counsel the dignity of a reasoned, published decision rather than the “you’ve got to be kidding me” reply a/k/a summary disposition.

They even declined to award appellate fees for advancing a frivolous argument.

 

Food & Beverages Aren’t Entertaining Under JCTA

Wednesday, October 24, 2018

Our colleagues at Gosule, Butkus & Jesson, LLP sent out an interesting newsletter recently in which they address the fact that the Job Cuts and Tax Act of 2017 (JCTA) has eliminated the entertainment portion of business deductibility, but not the 50% deduction for food and beverages. As the meat (ahem) on the statutory bone, the Treasury Department “intend[s] to publish” proposed regulations to clarify what will remain both ingestible and deductible:

  1. The expense must be ordinary and necessary
  2. It may not be lavish or extravagant
  3. The taxpayer or employee must be present
  4. The food & drink must be consistent with that provided to other similarly situated business contacts
  5. And, if the grub is purchased during entertainment it must be invoiced or specified separately from the entertainment.

What could possibly go wrong?

They’re all fun, but Item 5 on the menu caught my eye particularly. Gosule points out a $5 hot dog at a Red Sox game will be half deductible, while the $1,500 game tickets (hell, it’s playoff time) are not; while $200 worth of food and drink in a Celtics luxury box will not be deductible at all because it is not paid or billed separately from the ticket.

That’s as logical as calling another 9th inning pitching change in a 16-1 rout or 4th quarter NBA garbage time “entertainment”.

It does call to mind the tricky job of courts, arbitrators and special masters in adjudicating adjustments to a self-employed spouse’s income for attribution purposes. A lot of season tickets get packed into pass-through expense schedules! And, many of those tickets actually do go to customers…

It also reminds me of the dilemma of creating and parsing Probate and Family Court Rule 401 financial statements, where “food”, “meals out” and “entertainment”, both personal and business, mix and mingle with regularity, with double counting galore!

Coming to a deposition or hearing room near you…

 

Spousal Disqualification Still a Good Rule After M.T.J.C. LLC, et als. v. Steven Simon

Thursday, October 11, 2018

Levine Dispute Resolution - Alimony

In the unusual context of a U.S. Bankruptcy Court case, Judge Melvin S. Hoffman examined an evidentiary statute that is daily fodder in family law litigation, M.L.G., ch. 233, §20, known as the “spousal disqualification”. In short, §20 prohibits married or divorced person from testifying to private conversations between them that occurred during marriage.

It is not a waivable privilege, like the right to withhold testimony in a criminal proceeding against one’s spouse. It is a rule that neither party may relax, certainly not unilaterally; and, arguably, a judge should not rely on disqualified testimony, even if neither party is vigilant enough to object to its admission.

There are exceptions to the rule: domestic and child abuse cases, and at issue in M.T.J.C. LLC, et als. v. Steven Simon, cases where the spouses have entered into a contract with each other. Appellate cases have previously addressed construction questions such as: “can a ‘conversation’ be in writing?” (no); and “what is private”? (where a reasonable expectation of privacy exists, which may be negated by the presence of other persons who have the capacity to overhear and understand); and most recently, does the Alimony Reform Act (eff. 3.1.12) definition of marriage length (M.G.L., ch. 208, §48) terminate the period of disqualification? (no, private conversations remain disqualified until absolute divorce, under Balistreri v. Balistreri, Appeals Court 2018).

But, this bankruptcy judge faced a question that neither §20 nor appellate case law have yet addressed, namely, does the contract exemption to spousal disqualification apply in a lawsuit in which a third party is litigating against one of the spouses?

Because of the paucity of authority, Judge Hoffman tasked himself with “… predict[ing] how the Massachusetts Supreme Judicial Court would rule on this issue”. In doing so, he carefully reviewed the statute and interpretive case law, and concluded, soundly, that the contract exemption only applies when the spouses are themselves lawsuit opponents.

In other words, the court could not order Ms. Simon to testify about her private conversations with Mr. Simon about a contract between them, at the demand of someone else suing her husband.

Judge Hoffman’s scholarship is an interesting read, especially for those who encounter the disqualification on a daily basis, and rarely question its premises. He recites history and policy that underlay the statute: that spouses were considered “as one” in common law, that their interests were uniformly aligned, that the “bias of affection” would undermine reliable testimony, that marital peace would be disturbed, and that cross examination of the declarant might cause prejudice to the other spouse.

He concludes that even if many of these reservations “seem quaintly outdated”, they nevertheless ground a statute, which the trial courts are not free to alter.

As a family law arbitratorspecial master and litigating-lawyer-in-recovery, I can’t miss the unavoidable irony in the “bias of affection” justification for spousal disqualification. The divorce court’s problem is in fact, the polar opposite: think, “the bias of disaffection”.

Who among us has not encountered an estranged couple about whom we have thought “they can’t even agree that the sky is blue”? Hell, many of us have been there in ourselves personally…

The fact of the matter is that, quaint or not, spousal disqualification is a good rule. What harmonious couples talk about privately is no one else’s business; and how conflicting spouses remember it, or choose to recount it, clouded by conflation, confusion or convenience, gives rise to inherently unreliable testimony.

Factfinders struggle enough with the quantum of evidence in a field where parties and counsel fear leaving even the smallest pebble unturned. Opening divorce trials to endless “he/she/they said” testimony would be a race to the evidentiary bottom, producing even more heat and precious little light.

As a young litigator I felt the opposite. Age has its privileges, I guess.

 

No Country for Old Men, Part 5: The Appeals Court Tells 79-Year Old Alimony Payor “Si, Mas” Muellner v. Muellner

Thursday, September 06, 2018

Levine Dispute Resolution - Alimony

In an unpublished opinion under Rule 1:28, the Massachusetts Appeals Court recently consigned a septuagenarian couple to resumed legal combat in the Probate and Family Court, 14 years after their divorce. The appellate court vacated two modification judgments of the Probate and Family Court, reducing the now 79-year-old husband’s alimony to his former wife, for the judge’s failure to “demonstrate ‘appropriate consideration’” of:

  • the husband’s ability to pay;
  • the wife’s financial need; and
  • the “intent” of the parties as evidenced by their divorce agreement.

Putting aside completely the M.G.L., ch. 208, §49 (f) presumption that alimony terminates upon the payor’s attainment of full social security retirement age - a distant memory for this payor - since this divorce predated the Massachusetts Alimony Reform Act (eff. 3.1.12) (See, LDRC previous blog entries, “No Country for Old Men”, Parts 1 through 4) this decision is problematic for at least two reasons:

  • it appears that the trial judge is faulted for not considering information that the parties didn’t offer him at trial; and
  • the Appeals Court’s inference of the parties’ intent is pure speculation – the kind for which it might well criticize a trial judge.

Ah, Rule 1:28 decisions. The facts are not “fully addressed”, but one fact that the Appeals Court did disclose is that both modification “trials” were decisions entrusted to the Probate and Family Court judge by agreement of the parties, to be rendered on “stipulation[s] of facts in lieu of testimony”. No one gave direct testimony, and no one was cross-examined, no experts opined.

In other words, no trial at all, with all of its glorious inefficiencies and protections.

Then again, this is what the parties signed up for. Competent adults are, or should be, allowed to make decisions, including ones that disadvantage them. These parties were not juveniles – far from it – and they chose the rules by which they would play. No parens patriae, here. Essentially, they put the judge in the position of an arbitrator, limiting the evidence and circumscribing procedure; and accepting that the decision in generally binding.

The specters of 80-year-olds paying alimony, golden years spent in litigation and my self-indulgent blog title totally aside: shouldn’t the Appeals Court have left well enough alone?

 

Alimony and the TCJA: Less a Misconception than a Worry, and What to Do About It – A Mediator’s View

Wednesday, August 15, 2018

Levine Dispute Resolution - William M. Levine

By William M. Levine

Call me a skeptic.

I agree with Jonathan E. Field’s excellent essay “Alimony and the TCJA: A Common Misconception” (July 23, 2018), to the extent that he asserts that an alimony agreement that is executed during calendar 2018 should entitle the parties to the continued economic leverage of the alimony deduction, on which many divorcing families have relied since 1942. I wish that I shared Jon’s confidence that what should be will be, but I am less than sure.

Read literally, the 2017 Tax Cuts and Jobs Act permits tax-deductible alimony if contained in “decrees of divorce or separate maintenance or written instruments[s] incident to such decrees…” (my italics). I do not question that tax cases construe “written instruments” liberally, nor do I debate that the “incident to” clause has been applied generously to past taxpayers. But, we live in a time in which political and policy expectations are a wisp in the wind, subject to a profoundly polarized federal legislature and the whimsy of an erratic executive.

Every tax act is a legislative skeleton on which the reigning administration grafts regulations, telling us how the congressional mandate will really work. Witness Jon’s accurately ironic note that the “temporary” treasury regulations of the Tax Reform Act of 1984, that comprise a substantial part of how that set of alimony reforms function to this day, are now 34 years old!

The Internal Revenue Service of Stephen Mnuchin’s Treasury Department is charged with fleshing out TCJA; and it does so in a political/fiscal context. The public face of the alimony deduction repeal was a move to save $6.8 billions of tax revenues over the next decade, to be booked against Congress’ budget reconciliation limit of $1.5 trillion of cuts, to enable passage without Democratic votes. Meanwhile, a deeper problem lurked in the form of the IRS’s indifference or inability to enforce the existing law. In 2010 alone, 47 percent of alimony recipients failed to report any or all of alimony received, resulting in $2.3 billion of losses to federal coffers, according to a 2014 report of the Treasury Inspector General for Tax Administration.

So, we can see that the Trump Administration has incentive, especially in an election year during which the deficit is rising faster than projected, to interpret the alimony repeal in a way that maximizes revenues to offset some of TCJA’s corporate and high-income tax cuts. One contribution that Treasury can make is to promulgate regulations that interpret, or re-interpret, the “incident to” language that Jon cites, by limiting the alimony deduction to those taxpayers whose divorce instruments have actually been made a part of a divorce decree in 2018.

In Massachusetts, that would require the parties to step back from the Probate and Family court bench, with an approved and incorporated agreement, before the close of business on New Year’s Eve if a judgment nisi would suffice. Even worse, if the IRS requires a final divorce judgment (as it does in determining tax return filing status), the parties would need be in court before the end of August or September, given the post-hearing waiting periods of M.G.L., ch. 208, §§ 1, 1A and 1B.

As a divorce mediator, whose job includes providing enough information to assure both parties’ informed consent to divorce settlements, I cannot, despite Jon’s assurances, provide them myself. Rather, I feel obliged to explain the possibilities, even if remote, so that clients do not wake up on January 2d, or April 15th, and learn that some regulation sleight of hand has denied them the benefit of the alimony bargain that they made. It isn’t clear; and it is most surely not easy. But who among us can predict any act the current federal regime – especially with mid-terms looming?

So, what to do in mid-2018? For the dwindling cases that can realistically expect to appear for uncontested divorce hearings in August (§1A) or September (§1B), the question is academic. For the other couples who will be mediating during the balance of this year, I will be raising the issue, and asking them to consider the two-tiered approach of agreeing on an alimony regime that covers both deductibility outcomes; and trust them to make the appropriate decision, for them, in consultation with counsel.

With our alimony statute remaining as written, and 2019 agreements surely precluded from the alimony deduction, we are all going to have to struggle to create equivalencies for taxable and non-taxable spousal support, anyway. There are smart people among us who are studying fast and hard to create mechanical ways of doing that for us, as in, “for income levels of $X, the after-tax equivalent of 32.5% of gross income, fairly balancing the net payor cost versus net payee value gap, is $Y.” Another approach is to prepare case-by-case “old law” and “new law” cash flow analyses, and try, as closely as possible, to translate the net-after-tax shares for the parties with deductibility assumed, to the newer scenario, e.g., if deductibility would result in a 60%-40% sharing of net-after tax income, and then solve to that end result with non-deductible alimony assumed.

The specific approach taken is less important than that we all be aware of the challenge itself, and that we grapple with it in the cause of advancing the parties’ informed consent.

 

Alimony and the TCJA: A Common Misconception

Wednesday, August 15, 2018

Levine Dispute Resolution - Jonathan E. Fields

By Jonathan E. Fields

Under the Tax Cuts and Jobs Act of 2017, alimony will no longer tax deductible to the payor and no longer tax includable to the payee, effective Jan. 1, 2019.

The law was a shock to many, particularly divorce lawyers, most whom had gotten used to the way things had been for the last 7 years. There is a saving grace in the Tax Cuts and Jobs Act, or TCJA, however: Qualifying agreements and modifications can be grandfathered into the old taxability treatment subject to certain requirements.

Specifically, unless the parties opt­in to the new law, the TCJA applies to “decree[s] of divorce or separate maintenance or written instrument[s] incident to such ... decree[s]” executed after Jan. 1, 2019.

To unwind this legislative convolution: The old taxability provisions can apply to your qualifying pre­2019 agreem unless you both agree that you don’t want them to. Still a mouthful, but that’s the way Congress wrote it.

The biggest misconception about alimony and the TCJA, frequently repeated in the lay media, and even by legal commentators, is that the qualifying instrument must be a final divorce judgment. It does not. You do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered.

Lawyers, who like to be “better safe than sorry,” may prefer to have a divorce judgment, but when you are fighting this issue out in December of this year without the luxury of time, it’s worthwhile to take a closer look at what is actually required.

Procrastinators can rejoice. The TCJA continued the requirement from IRC s.71 that a payment made to or on be of a spouse or ex­-spouse pursuant to a “written instrument incident to [a divorce decree]” qualifies for alimony treatment.

The TCJA further sets forth that such instruments are “as defined in s.71 ... as in effect before” the TCJA.

Presumably, the case law from the past several decades interpreting the clause remains relevant and binding.

So, basically, in many instances, all a couple may need to qualify for grandfathered alimony treatment is a contra by Dec. 31, that is a “written instrument incident to [a divorce decree]” pursuant to the statute. The “contract” h is no more prescriptive than a common law “meeting of the minds” contract — except that, unlike in the common law, it must be in writing. A separation agreement signed by the parties and approved by the court should do; no need to wait for a final judgment of divorce 90 to 120 days later. A separation agreement not yet approved by th court should also suffice.

But it doesn’t even have to be that formal. Two Tax Court opinions illustrate the flexibility of the “written instrume incident to a divorce” requirement.

A Tax Court Memorandum Opinion, Leventhal, T.C. Memo. 2000­92, made clear a “meeting of the minds” requirement, particularly that there be a “clear statement in written form memorializing the terms of the support between the parties.” In this case, one spouse’s written assent to a letter proposal of support by the other spouse was a sufficient writing to bring it within IRC s.71.

Moreover, Leventhal tells us, it was not necessary to articulate a specific amount of support so long as “there is a ascertainable standard with which to calculate support amounts.”

A Tax Court Summary Opinion, Micek, T.C. Summ. Op. 2011­45 (2011), is also instructive for our purposes. Here, the couple separated in 1997 and entered into an oral agreement in 1999 that the husband pay the wife alimony $1,250 per week. Later that year, the husband signed a “spousal support affidavit” agreeing, or reaffirming, the payment of alimony in the same amount.

In 2003, the husband stopped paying because he became disabled and, presumably, was unable to earn income.

The wife’s attorney then wrote to the husband, inquiring as to why the alimony stopped. Think about this: There still no divorce pending at this point, the wife hasn’t signed anything yet, and the wife’s lawyer wrote the letter described above four years after the husband started paying alimony.

A few more years go by. At some point — the opinion does not make clear when — the husband filed for divorce Presumably satisfied that neither party had the means to support the other, the parties’ agreement incorporated the divorce judgment mutual waivers of present and future alimony.

In 2009, the IRS filed a notice of deficiency disallowing the husband’s alimony deductions for the years 2000 to 2003, the period prior to the divorce during which the husband was paying alimony to the wife. All of the paymen at issue were made prior to the filing of the divorce.

The husband took the matter to Tax Court. The issue before the court was whether the alimony was paid pursua to a “written instrument incident to [a divorce decree].”

The Tax Court agreed with the taxpayer, finding that alimony was paid pursuant to such an instrument and, therefore, deductible to him and includible to his ex­wife. The Tax Court reasoned that (1) the so­called “spousal support affidavit” signed by the husband in combination with (2) the letter from the wife’s attorney inquiring as to why he had stopped paying alimony (which evidenced her client’s understanding that alimony was to be paid) wa sufficient to qualify under IRC s.71. That is, a written instrument (the affidavit) signed by one party and the lette from the wife’s attorney was together a sufficient “written instrument” that evidenced the meeting of the minds between the parties.

    ❝ The biggest misconception about alimony and the Tax Cuts and Jobs Act is that the qualifying instrument must be a final divorce judgment. It does no do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered.

Considering the significant time gap between the instrument and the divorce filing, it is striking that Micek did no focus on the requirement that the “written instrument” be “incident to [a divorce decree].” We might deduce from Micek that timing is not dispositive to the “incident to” requirement but that it is, rather, a sort of “totality of the circumstances” analysis.

Indeed, the parties had been living separately and the husband had been paying alimony for several years, and, eventually, they got around to making de jure what had been de facto. From this, it would appear a logical construction that the alimony payments at issue, though made several years before a complaint for divorce, were “incident to” a divorce.

In any event, to play it safe, the practitioner should endeavor to have the contract executed while a divorce is pending or imminent in order to meet the “incident to divorce” requirement — so, unlike Mr. Micek, nobody is rely on the Tax Court to save the day.

Bottom line: a divorce judgment is not the only way, under the TCJA, to get the preferential tax treatment that alimony judgments today can enjoy.

In the context of Micek and the “incident to” discussion above, consider prenuptial or postnuptial agreements. Although there is no case law on the issue, these do not appear to be qualifying agreements pursuant to IRC s.7 They are not, in the same sense as the Micek agreement, “incident to” a divorce decree, even if one of the partie filed for divorce shortly after signing.

Two additional issues merit consideration: (1) Must a 2018 agreement contain a present award of alimony, and (2 How should the practitioner handle 2018 temporary orders of alimony followed by a 2019 (or later) divorce judgment?

As for (1), it is unclear whether a 2018 agreement that contains no present award of alimony but preserves the rights of the parties to future alimony would qualify for preferential retroactive treatment.

On the one hand, the TCJA’s new alimony rules exempt from its application “any divorce or separation instrument executed before 2019. That would suggest that any agreement would suffice, whether or not it includes a presen award of alimony.

On the other hand, elsewhere in the TCJA alimony is defined, subject to other conditions, as payments made to o on behalf of a spouse pursuant to a “divorce or separation instrument.” Arguably, read together, there needs to b present award of alimony — actual payments must be made (or required).

In light of the uncertainty, the cautious practitioner would do well to include a requirement of a present payment alimony, if only a nominal amount, and a statement in the agreement to the effect that the parties intend the agreement to qualify for tax preferential treatment per the TCJA.

As for (2), temporary orders pose challenges when dealing with the TCJA and retroactivity. If there is a 2018 temporary order of alimony followed by a 2019 divorce judgment, the temporary order is extinguished. With that the link to retroactivity may be severed. That is not clear, of course, but it is a possibility.

Therefore, the practitioner may want the judgment to incorporate the temporary order so as to preserve best as possible the benefits of a qualifying retroactive instrument.

This position is generally consistent with the IRS regulations for alimony pursuant to the Tax Reform Act of 1984, which also dealt with the issue of the retroactive application of that law to instruments entered prior to that act’s effective date of Jan. 1, 1985.

Those regulations (which, by the way, have been “temporary” for 34 years) made clear, for example, that if a 198 divorce judgment incorporated without change the terms of a 1984 instrument, that 1985 judgment would be grandfathered under the then pre­existing tax law. 26 CFR s1.71­1T (Q­A #26).

The 1984 regulations do have one caveat that the practitioner may wish to consider: The subsequent judgment must incorporate the terms of the prior instrument “without change.”

Clearly, we don’t know if the IRS will interpret the TCJA’s alimony provisions in the same way, but it may be worthwhile to at least consider these regulations as we venture into uncharted territory. If the IRS were to adopt this position with respect to the TCJA, it would certainly be problematic in the event a 2018 judgment provides fo nominal alimony payment and a post­2018 judgment calls for a larger payment.

In the months ahead, while many labor to complete agreements by year’s end, we can hope for clarifying guidan from the IRS. In the meantime, especially in the gray areas, practitioners would do well to let clients know, in writing, where there are uncertainties as to whether their agreements will be grandfathered.

Jonathan E. Fields is a family law attorney and partner at Fields & Dennis in Wellesley Hills. He can be contacted jfields@fieldsdennis.com.

 

A Well-Reasoned Opinion from the Appeals Court on a Tricky Subject: Calhoun v. Rawlings

Wednesday, July 11, 2018

Levine Dispute Resolution - Divorce Mediation

The Massachusetts Appeals Court recently reviewed the decision of a Superior Court judge on the question of whether or not a spendthrift trust settled for the benefit of a disabled person, created and funded with a divorce settlement - assets transferred to the trust by his (ex-) wife – was a “self-settled” trust as a matter of law, and hence, reachable by a potential tort-creditor of his estate. The husband’s court-appointed guardian signed the separation agreement and trust instrument on his behalf.

The trust named the wife as the settlor; and it appointed the husband’s guardian, his sister and a bank as trustees, with broad discretion. The wife funded the trust with assets exceeding $4 million in value; and the husband transferred some $120,000 from his own name into the trust.

The husband appears to have later caused an automobile collision, in which he died, while seriously injuring the occupants of another other car, resulting in a lawsuit for damages, seeking, in part, a declaration that the husband’s trust assets are available to the plaintiffs for potential damages. The Superior Court judge ruled that the plaintiffs could only reach that part of the trust corpus that the husband’s own cash funded, which the judge deemed to be the trust “self-settled”. The plaintiffs appealed.

Justice Amy Blake wrote the opinion of the Appeals Court, with clear analysis and expression. “Self-settled” trusts, or those where the creator and the beneficiary are the same, she observed, cannot serve as a firewall against creditors as a matter of public policy, at least to the extent that distributions are permitted to the beneficiary in a “support or discretionary trust”. The case turned, then, on whether or not the portion contributed by the decedent’s wife as a divorce settlement should also be deemed “self-settled”.

Justice Blake wrote of the need look past the labels of a trust to determine its true character. Remember that the wife was the named settlor of the trust, and she literally paid in 98% of the trust holdings. But, the court reasoned that her transfer was not a gift, but rather a disgorgement of marital assets to which the husband was equitably entitled under M.G.L., ch. 208, §34.

The court then invoked the law of contract, reasoning that in return for the wife’s recognition of the husband’s equitable property rights, he (by his guardian) consented to the trust’s creation, thus, providing consideration. In so doing, the husband, substantively, even if not in form, settled the trust. She then drew on analogy, comparing this to a pair of cases involving Medicaid and bankruptcy wherein a conservator created a trust, the other was funded by inheritance, each deemed to be “self-settled” despite literal trust nomenclature.

In the end, the spouses’ intent to shield the assets from creditors fell to the public policy that bars a creditor from a self-interested embargo of assets.

As we read this decision, we fully expected the opposite outcome, but by the end, we said “of course”. All in all, a really good appellate read.

 

“[T]he Parties Proceed at Their Own Risk” in the Probate and Family Court: Smith v. Smith

Wednesday, June 27, 2018

Levine Dispute Resolution - Alimony

For decades, Massachusetts divorce lawyers have advised their clients that if they depart from their divorce judgment obligations informally, and don’t incorporate their new deal in a modification order or judgment, they cannot rely on their consensus alone if one of the party decides to enforce the divorce orders that still exist, in court. The Appeals Court now says that we have all been wrong, with the blazingly ironic “... the parties proceed at their own risk.”

In a court system and body of law with judicial discretion that sometimes takes the breath away, life just became even less predictable. As did advising clients.

In Smith v. Smith, the husband accumulated $87,400.00 of alimony arrearages but claimed that he did so with the wife’s advance agreement, sometimes in return for his taking on voluntary financial burdens for emancipated children. The wife eventually thought better of her purported compromises, and she sued. The Probate and Family Court judge bought the husband’s claim that he relied on the wife’s prior agreements to his detriment, rejecting the wife’s claim of coercion, and wiping out the husband’s arrearages.

For reasons not addressed in this entry, the Appeals Court reversed the Probate Court’s retroactive reduction of the husband’s alimony, but it upheld that trial judge’s ruling of non-contempt, because the wife’s consent precluded a finding that the husband’s violation of the alimony orders was “undoubted”. So much for the previously given truth that only the court can modify its own orders.

In support, the Appeals Court cited its own Wooters v.Wooters, a case in which the husband was relieved of a contempt finding, while the established an alimony arrearage nonetheless, because of a bona fide dispute about the meaning of the alimony order: did a divorce judgment that ordered a lawyer to pay his wife a third of his compensation apply to a stock option income, that didn’t exist at the time of divorce, but arose later, when the husband left law practice for a corporate job.

Readers can reasonably debate the Appeals Court’s conclusion in Wooters, but what does a legal dispute over the meaning of the previous order have to do with the Smith judgment, with orders of unquestioned meaning? In fairness, the Appeals Court’s citation was limited to the principle that an arrearage (they even called it a “violation”) need not compel a finding of contempt. Wooters to Smith is, at best, a non sequitor.

An important principle was at stake, here. Either parties can or cannot supplant the court’s authority by their own behavior. If they do, the violation cannot be doubted. The question, really should be “can it be excused?

The answer to the real question now appears to be a resounding “maybe”, as in “maybe they can”. In a field where lawyers struggle to give clear and assured advice, life just became more, rather than less, uncertain.

 



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